China appeases workers with plan to raise tax threshold

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In a rare measure aimed at increasing social equity, the Chinese government plans to nearly double the threshold under which individuals do not have to pay income tax. It took 25 years and a rising tide of anger from the salaried class which bears the heaviest tax burden to change the minds of Beijing's bureaucrats.

Late last month, the National People's Congress started to discuss a draft amendment to the tax law that would raise the minimum taxable income from 800 yuan, set in 1980, to 1,500 yuan. It would also order those on high incomes to fill in their own tax forms under pain, should they under-report, of prison or a fine equal to five times the amount they have evaded. China's income tax rates range from 5 per cent to 45 per cent.

The change has little to do with the government's efforts to balance the budget and much to do with a rising wealth gap and taxpayer anger. Last year, the Ministry of Finance received 174 billion yuan in income tax, accounting for less than 7 per cent of total tax revenue of 2.57 trillion yuan. It estimates that losing the contributions of those earning between 800 yuan and 1,500 yuan will cost it 20 billion yuan.

The ministry plans to recoup this money by more rigorous collection from the rich, which should more than compensate for the lost revenue.

The question is why it took so long to change the law in an economy where incomes have risen more than 15-fold since 1980. That year, the average Chinese farmer earned 16 yuan a month and his urban cousin 40 yuan. Less than 1 per cent of people qualified to pay income tax, official data shows. Last year, the average farmer earned 245 yuan a month and his urban cousin 786 yuan, putting nearly 50 per cent of these segments within the tax bracket.

The gap between rural and urban incomes has been increasing. Annual growth in the cities of 8 per cent to 9 per cent a year is double that in the countryside. The Gini coefficient, which tracks the gap between rich and poor and considers 0.4 as 'unacceptably wide', stands at 0.447 in China.

'The NPC wanted to change the [income tax structure] in 1997 and 1998 but could not because it could not reach agreement on how to do it,' said Sun Gang, research director at the tax bureau. 'Public demand for reform has been very loud. This is a major reason for the latest change. If we wanted to raise more money, we could increase VAT (valued-added tax) by 0.5 percentage point. VAT brings us one trillion yuan a year against only 170 billion in income tax. The purpose of this reform is to adjust incomes.'

The public is angry because it sees the tax system as unjust. Those on fixed salaries pay 65 per cent of total income taxes, which is easy to collect because companies report their earnings to the tax bureau and often deduct tax from their wages.

It is the rich who evade tax, not the poor. These include actors, singers, lawyers, professors, other self-employed people and managers of private and state firms who can conceal personal spending by using company accounts. According to official estimates, about 1.67 million people in China earn at least 120,000 yuan a year.

Ministry officials admit that the revision is just one step along the way towards making people comply with their tax obligations. China's tax collection system is not computerised, people commonly use false names for bank accounts and much business is conducted in cash. Ministry officials have no way to track the revenue of many companies.

Add to this the fact that many people reject the idea that they should pay tax at all, out of greed or lack of faith in the government.

Under the old system, the government provided urban residents with cheap housing and free education and medical care, so that they could see the direct benefits of state spending.

Now, they have to pay from their own pockets for these services and have no way of knowing how and where their tax money is spent. Nor do they have any say in its use. Each day, they read newspaper reports of how officials have stolen millions of yuan in public funds. So the government has a hard job persuading people to pay tax.